Shocking Truths About RRSP Withdrawals

The Shocking Truths About RRSPs

I have reprinted the following news article that appeared in The
Province newspaper on Tuesday, January 9, 2007.

The statistics and rationale are revealing as well as shocking.

Are you one of them?

RRSP Withdrawals common – study finds

Toronto - CanWest News Service– More that a third of Canadians have
withdrawn funds from their retirement savings plans, which could
have a significant impact on their retirement, according to a new study
by the Bank of Nova Scotia.

“There may be a strong reasons to make an RRSP withdrawal, such as
buying a home, but we remind Canadians that it is important to make
regular RRSP contributions,” said Ian Filderman, director of mutual
funds at Scotiabank.

More than 1,000 investors over 18 participated in the on-line survey in
October.

According to the report, withdrawals from RRSPs have on average
been $18,000. Of the people surveyed, 37 per cent listed top reasons
as to buy, build or get a mortgage for a new home.

Paying down debt was listed as the top choice for 24 per cent and
covering day – to – day expenses was listed at 20 per cent.

Canadians are expecting to live longer than ever and their RRSP
savings should reflect that, Filderman said.

A Scotiabank survey in 2006 found Canadians expect to live to about
85.

Of those people surveyed, 17 per cent said they will need about
$100,000 for their retirement.

- Article End -

SetForLife Financial Services
http://HowToBeSetForLife.com
Copyright 2006. Mark Huber, CFP All Rights Reserved.
-1-

Now lets analyze this for a moment...

Why are one third of Canadians (this suggests 8 million of us)
taking out money from their RRSPs?

Well, because that is all the money they have saved and invested.

And why? Because they are contributing just for the tax relief.

Then when they need cash for opportunities (buying a home) or
emergencies (paying off credit cards and covering for
day – to – day expenses) - they tap their RRSPs.

This is not a good strategy!

It's important too understand why this happens.

As many of you know I believe that Canadians are so focused
with paying off their mortgages that they have little money
left over for things like tax relief (contributing to RRSPs)
or building up non RRSP investments and savings for
emergencies or oportunities.

This is why so many are tapping their RRSPs - to get out of
debt and to cover living expenses when they find that their
paychecks do not cover the lifestyle that they have.

I see this all the time - and its getting worse!

The answer - don't get into the vicious cycle to begin with!

How To Get A 50% Return On Your RRSPs – Guaranteed!

This is available to:

1. Canadians who are concerned with the amount of taxation of
their RRSPs

-2-

2. Canadians who want control of their investment assets without
“interference” from the “tax man”

3. Canadians who wish larger tax deductions than is currently
allowed with RRSPs

4. Canadians who want a retirement lifestyle without “claw backs”

5. Canadians who are concerned about leaving their estate with a
significant tax liability on death due to their registered
investments.

6. Canadians who want to use a borrowing strategy where THEY
are the bank.

The main purpose of this program is to get money OUT of an RRSP
without being drowned in tax.

This strategy is now even more desirable with recent tax changes
where now only 50 per cent of investment capital gains must be
included in your income for tax purposes.

But be aware that meltdown involves using borrowed money—and as
such, may not be suitable for everyone. Leveraging can amplify gains
and losses and you have got to be comfortable with that.

The strategy in detail

Under the meltdown strategy, you withdraw money from your tax-
deferred RRSP plan to service a “borrow for investment” loan.

The following, illustrates an annual RRSP withdrawal $7,500 which
covers the $7,500 carrying charge associated with a $100,000 loan at
a 7.5% interest rate.

Now, at tax time you will add $7,500 into your income, BUT that
$7,500 is offset by the $7,500 deduction you can take on the
investment loan interest.

-3-

So, just by changing the location of your invested capital you are
transferring the embedded tax from a place where it’s fully taxed to a
place where it’s half-taxed!

Or put another way – converting your 100% taxable dollars to
50% taxable dollars.

Now which scenario appeals to you?

As we all know your registered investments such as RRSPs and RRIFs
are going to be taxed someday—it’s just a matter of when and by
how much.

Now, investors should break the strategy into its two components and
look carefully at each. First, assess your suitability for leveraging. The
real crux in successful leveraged investing is making sure the money
is invested prudently.

Then look at the wisdom of pulling money out of your RRSP early. It
could make sense, especially if you are in a lower tax bracket now and
anticipate that in retirement—perhaps with a company pension being
paid—you will be in a higher one.

Another scenario is that you just want too use your RRSP as the
“bank” and use the “meltdown” mechanism to grow more assets
without the severe tax implications inherent with RRSPs.

Unlike RRSPs, the non registered portfolio will always be available to
fund the things in life that come along, like: a new roof the house,
braces for “little Johnny”, a college education for the kids, a new car,
exotic trips, OR a larger lifestyle in retirement!

-4-

How To Get More In Retirement – Guaranteed!

RRSP
Canadian Canadian Value Canadian
Balanced Balanced Annual After Balanced Deductible
Client Annual Fund Annual Fund Withdrawal Withdrawal Annual Fund Interest Cost
Age(s) Year Returns RRSP-1 Returns RRSP from RRSP RRSP-2 Returns Open 7.50%
("Host
(left alone) Accnt") (recipient)
(loan owing)
$50,000.00 $50,000.00 $100,000.00
42 2006 -7.4 $46,300.00 -7.4 $46,300.00 ($7,500.00) $38,800.00 -7.4 $92,600.00 $7,500.00
43 2007 18.9 $55,050.70 18.9 $46,133.20 ($7,500.00) $38,633.20 18.9 $110,101.40 $7,500.00
44 2008 28.3 $70,630.05 28.3 $49,566.40 ($7,500.00) $42,066.40 28.3 $141,260.10 $7,500.00
45 2009 6.2 $75,009.11 6.2 $44,674.51 ($7,500.00) $37,174.51 6.2 $150,018.22 $7,500.00
46 2010 19.7 $89,785.91 19.7 $44,497.89 ($7,500.00) $36,997.89 19.7 $179,571.81 $7,500.00
47 2011 4.5 $93,826.27 4.5 $38,662.80 ($7,500.00) $31,162.80 4.5 $187,652.54 $7,500.00
48 2012 1.2 $94,952.19 1.2 $31,536.75 ($7,500.00) $24,036.75 1.2 $189,904.37 $7,500.00
49 2013 12.3 $106,631.31 12.3 $26,993.27 ($7,500.00) $19,493.27 12.3 $213,262.61 $7,500.00
50 2014 17.7 $125,505.05 17.7 $22,943.58 ($7,500.00) $15,443.58 17.7 $251,010.09 $7,500.00
51 2015 -12.4 $109,942.42 -12.4 $13,528.57 ($7,500.00) $6,028.57 -12.4 $219,884.84 $7,500.00
52 2016 17.8 $129,512.17 17.8 $7,101.66 $7,101.66 17.8 $159,024.34 $100,000.00
53 2017 1.8 $131,843.39 1.8 $7,229.49 $7,229.49 1.8 $161,886.78 (Loan Paid)
54 2018 27.2 $167,704.79 27.2 $9,195.91 $9,195.91 27.2 $205,919.99
55 2019 -2.2 $164,015.29 -2.2 $8,993.60 $8,993.60 -2.2 $201,389.75
56 2020 13.8 $186,649.40 13.8 $10,234.72 $10,234.72 13.8 $229,181.53
57 2021 27.6 $238,164.63 27.6 $13,059.50 $13,059.50 27.6 $292,435.64
58 2022 7.7 $256,503.31 7.7 $14,065.08 $14,065.08 7.7 $314,953.18
59 2023 -5.4 $242,652.13 -5.4 $13,305.57 $13,305.57 -5.4 $297,945.71
60 2024 15.2 $279,535.25 15.2 $15,328.02 $15,328.02 15.2 $343,233.46
61 2025 11.3 $311,122.74 11.3 $17,060.08 $17,060.08 11.3 $382,018.84
62 2026 -2.3 $303,966.91 -2.3 $16,667.70 $16,667.70 -2.3 $373,232.40
63 2027 -6 $285,728.90 -6 $15,667.64 $15,667.64 -6 $350,838.46
64 2028 12.9 $322,587.93 12.9 $17,688.76 $17,688.76 12.9 $396,096.62
65 2029 8.3 $349,362.73 8.3 $19,156.93 $19,156.93 8.3 $428,972.64
66 2030 12.6 $393,382.43 12.6 $21,570.70 $21,570.70 12.6 $483,023.19
($75,000.00) $75,000.00
Ttl.
9.20% RRSP 9.20% Withdrawal RRSP 9.20% Non-RRSP Ttl. Deductible
Before Before
Tax $393,382.43 $21,570.70 Tax $ 483,023.19 Interest Cost
After $ After
Tax $236,029.00 12,942.00 Tax $ 386,418.00

* Disclaimer: The rate of return or mathematical table shown is used only to illustrate the effects of the
compound growth rate and is not intended to reflect future values of the mutual fund or asset allocation
service or returns on investment in the mutual fund or from the use of the asset allocation service.
Mutual funds are not guaranteed, their values change frequently and past performance may not be
repeated.
-5-

Rationale: To utilize a disciplined methodology to transfer 100%
taxable dollars from RRSPs to 50% taxable dollars in non registered
(open) accounts.

What the numbers mean:

RRSP - 1: Net after tax value = $236,029

RRSP - 2: Net after tax value = $12,942

Open: After $100K loan repaid in 11th yr. AND net after tax value =
$386,418

Summary: RRSP-2 and Open = $399,360 OR $163,331 MORE OR
69% BETTER than RRSP-1 Strategy ONLY

Canadians age 69 MUST convert Registered investments into income -
NOT SO with "open" non investments!

Illustrating both RRSP and non registered investments cashed out at
age 66 for fair after tax comparison.

Note : 40% Marginal Tax Bracket Assumed.

Also, “open” non registered account assumed to be 100% capital gains
eligible for the 50% inclusion rate for tax calculations. In reality, this
would be a mix of capital gains, dividends and interest – depending on
the asset mix to reflect investor “risk tolerance”.

Closing Comments:
The illustrated strategy is just that – an illustration of one set of
numbers.

Please note that this strategy works for any numbers – both large and
small RRSPs and large and small amounts to be borrowed for
investment purposes.

-6-

Additionally, there are many “variations on this theme” that can be
employed.

For example, one can continue making RRSP contributions and still
implement a “borrow to invest” strategy. Or one can make reduced
RRSP contributions and still employ this strategy.

For those that have not made RRSP contributions for some time and
have a small amount of RRSPs just sitting – this strategy makes
perfect sense to consider when you review the illustration again!

For those that are currently retired and are forced to be accepting
income streams from their RRIFs this concept would give much needed
tax relief.

So as you can see, there are many ideas and variations that spring to
mind and can be implemented.

Mark Huber, CFP

“Live out of your imagination, not your history.”

"Tell me what success is to you and I'll draw the plans to build the life of
your dreams".

-7-

PS: If you'd like to explore these and other ways to increase the
likelihood of your financial success, contact me directly at
(604) 207-9970 or click below:
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Report

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http://HowToGetRidOfYourMortgage.com/TheUnCanadianWay.html

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http://HowToBeSetForLife.com/RRSPsTheUnCanadianWay.html

"The UnCanadian Way To Finance Your Kid’s Education”
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"The Top 20 Financial Planning Questions I Am Asked
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http://www.howtobesetforlife.com/with/20FPQuestions.html

-9-

About the Author
Mark Huber is a proud Canadian living with his wife in scenic Richmond, British
Columbia, Canada.

For over 21 years, Mark has worked in the financial services industry. The focus of
Mark’s financial planning advisory practice is focused exclusively to British Columbian
(BC) Canada residents.

Mark’s boutique planning practice works with a select group of clients who are all
share a passionate vision for creating true wealth and living their dream lives.

Mark is author of “The UnCanadian Way” series of eBooks and audios. These
powerful resources share innovative ideas and wealth building strategies to
Canadians so that they will never again view their home, their mortgage, their debts,
or their assets in the same way again.
Visit: http://HowToGetRidOfYourMortgage.com

Mark also maintains a premier financial planning site at:

_______________________________________________________________________

Mark Huber, CFP

Richmond, British Columbia, Canada

Office Phone: Richmond (604) 207-9970
Office Fax: Richmond (604) 207-9971
Office Phone: Burnaby (604) 439-3341
Office Fax: Burnaby (604) 439-1900

E-Mail: mhuber@HowToBeSetForLife.com
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Blog: http://HowToBeSetForLife.com/TheUnCanadianWay/

-10-

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-13-

Copyright 2007 SetForLife Financial Services. All rights
reserved world wide.

Neither Mark Huber, SetForLife Financial Services assume any liability
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on his personal observations and 21 years of experience in the
financial services industry.

Use this information at your own risk. Be responsible! Always
do your own due diligence.

-The End-

-14-

Shocking Truths About RRSP Withdrawals

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